Regional News
Two years ago, when the world was in love with emerging markets, India could have attracted much of the capital it desperately needed to get its infrastructure act together. With interest rates low, debt capital was cheap and equity investors were desperate for the higher returns available in the faster growth countries of Asia.
Today, it is too late – at least for the time being. The cost of capital is going up and most investors are in risk-averse mode.
Since India has a current account deficit, it has to attract capital from the rest of the world. But banks are going to be less generous with their lending as a result of more onerous capital requirements. Issuers in the bond markets are finding that their borrowing costs have risen.
In a globalised world, companies and countries whose cost of capital is on the rise will be at a competitive disadvantage compared with those that have a relatively lower cost of capital.
That can only mean the gap between capital-scarce India and flush China will continue to get bigger.
Net foreign direct investment in India in 2010 plummeted 44 per cent year on year to $11bn, with the drop especially pronounced for vital infrastructure projects, where inflows almost halved compared with the two previous years, according to data from Morgan Stanley.
Both foreign and local business sentiment have turned extremely bearish on India as a result of government drift and corruption and the hassles of dealing with inadequate power, transportation bottlenecks, routine flooding in cities with insufficient drainage and intermittent water supply.
The country “is now becoming the land of scams”, says one senior Indian banker. “The amounts involved are frightening.”
Some of India’s most successful businessmen such as Mukesh Ambani plan to invest more outside India than inside in coming years. South-east Asia, especially natural resource-rich Indonesia, is full of Indians who prefer to deal with governments other than their own.
Better to ship coal to India from Sumatra or Kalimantan in Indonesia than dig it up from mines in Bihar and transport it across the country.
A joint venture between Indian property developer Unitech Group and NCC, a Blackstone-invested Indian infrastructure company that has been locked in a bitter dispute with the National Highways Authority of India for years, demonstrates the difficulties India faces in attracting the resources it so badly needs to build roads, generate power and provide water.
The dispute involves tens of millions of dollars of payment which the joint venture alleges it is owed for work completed on a highway in the state of Andhra Pradesh.
The project was finished in April 2005, nearly four years after work began.
Unitech and NCC are among many companies that have allegedly not been paid for work the NHAI commissioned, according to people familiar with the matter.
Some private sector executives estimate that the NHAI owes more than $2bn in total claims.
“We will go through the judicial procedure,” said J.N. Singh, a member of the finance division of the NHAI. “They [Unitech-NCC] have certain claims from their side but we also have our side.”
Mr Singh dismissed the $2bn figure as “rubbish”.
Executives at the private equity arm of IDFC, an infrastructure funding firm, say they have many companies facing endless delays in getting paid for work they have done for the highways authority and other government agencies. Power companies also complain of not being paid.
Meanwhile, at a recent conference in New York, one senior official of the US-India Business Council referred to the hesitancy of foreign companies to become involved in putting money or resources in India because of the difficulty in getting paid and the equally challenging task of getting redress from the courts.
So far, NCC and Unitech have won their dispute at every level to which it has been referred, including a review by an independent engineer at the project level, the Dispute Review Board and an arbitration proceeding in Delhi.
Despite these setbacks, NHAI has lodged an appeal in the Supreme Court which has yet to schedule its first hearing on the case, people familiar with the matter say.
To many observers, such interminable legal procedures and the Indian court system generally resemble the famous legal case that goes on for decades in Charles Dickens’ novel Bleak House.
The problem is that the rest of the world is not on traditional Indian time – and neither is an increasing part of the Indian population.
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By: Henny Sender
Source: Financial Times, Oct. 13, 2011
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